FAQs for Landlords and Tenants of Commercial Properties

Updated 14 October 2021

Landlords of Commercial Properties - FAQs

It is an uncertain time for landlords and tenants alike at present. Below, we have sought to address some questions we are being regularly asked by landlords of commercial properties. If you have any further questions arising, please do contact us.

"What do I do if my tenant of commercial premises does not pay the rent due under the lease?"

If your tenant fails to pay the rent due under its lease, the below is a summary of the options that are likely to be available to you:

• Forfeiture The Government has passed legislation preventing landlords from exercising rights to forfeit leases of commercial premises where a tenant fails to pay the rent before 25 March 2022.  Please see our separate note on this issue.
• Commercial Rent Arrears Recovery (CRAR)This involves sending a bailiff round to seize goods on the tenant's property to pay the unpaid rent. There is a notice that needs to be served beforehand. Bailiffs are generally instructed directly to exercise CRAR. However, restrictions over the use of CRAR were brought in in March 2020, and have been extended throughout culminating in the current position. There may be practical issues in bailiffs attending or entering premises if there are COVID-19 restrictions in place, e.g. the Government measures requiring people to stay at home except for very limited purposes during lockdown periods. Further, for CRAR actions started after 24 June 2021 until 25 March 2022, the minimum arrears necessary to exercise CRAR is 554 days' rent.
• Statutory Demand Service of a statutory demand gives the tenant 21 days to pay the outstanding sum. If the tenant fails to do so, you can present a bankruptcy or winding up petition to make the individual or company insolvent. However, the Corporate Insolvency and Governance Act, which received Royal Assent on 25 June 2020 restricts landlords' abilities to serve statutory demands/issue winding up petitions as follows:
  • No winding up petition can be presented on or after 27 April 2020 on the ground that a company has failed to satisfy a statutory demand, if the relevant statutory demand was served during the period beginning 1 March 2020 and 30 September 2021.
  • As regards the presentation of a petition on the basis that a company cannot pay its debts as they fall due, the debt threshold for winding-up petitions has been raised to £10,000, and no petition can be presented by a creditor from 1 October 2021 to 31 March 2022, unless the creditor has reasonable grounds for believing that (a) Coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if Coronavirus had not had a financial effect on the debtor. The burden of proof is therefore on the creditor to demonstrate to the Court that it has reasonable grounds for believing that Coronavirus has not had a financial effect on the debtor or would not have mattered in any event. Given that very few businesses have been unaffected by the current pandemic, this will inevitably be a difficult test for the creditor to meet. This should therefore give businesses the opportunity to reach realistic and fair agreements with its creditors.
• Letter before Action A threat to issue proceedings (including costs) may be enough to get the tenant to pay.
• Rent Deposit If cashflow is the biggest issue then taking the money from the rent deposit and asking the tenant to top it up may be the best immediate option.
• Guarantor Threatening to sue/serve a statutory demand on a guarantor may encourage the tenant or the guarantor to pay. However, the limitations on the service of statutory demands/winding up petitions set out above apply to corporate guarantors as well.
• Interest Reminding the tenant that you can charge interest on any late payment may encourage payment of the rent now to avoid interest accruing.

If you choose to exercise any of these remedies, please be aware that due consideration needs to be given to the occupational documents as each lease differs and there are certain procedures to follow.  Please do contact the Property Litigation team if you need any specific advice on this.

"Can I come to an arrangement with my landlord or tenant to change the amount of rent or pause the payments?"

The simple answer to this is “yes”, but the arrangement needs to be clearly documented. As most arrangements will be in place for a relatively short period of time, it is unlikely you would want to vary the lease. As such, a side letter clearly documenting the arrangement should be put in place. The Property Litigation team has put a number of these in place for clients recently and are available to assist.

"Does the COVID-19 outbreak create an event which frustrates the lease such that the tenant could walk away?"

This is highly unlikely. Frustration has a very high threshold to be met, which would involve the tenant demonstrating there has been some form of frustration of common purpose that renders performance of the lease impossible. If the lease has a force majeure clause, a tenant could seek to rely on it. It is very rare for a lease to include such a clause and, even if it did, it is uncertain whether it would apply given that the event is unlikely to be permanent.

"Will a tenant be in breach of a keep open clause if it shuts the premises?"

Strictly speaking, closing the premises will be a breach of a keep open clause. However, the courts will not enforce these clauses by granting orders for specific performance. We also consider it unlikely they will order a tenant to pay a landlord damages where a tenant is complying with Government guidance. In addition, if the rent continues to be payable under the lease, there is a question as to what the landlord's loss is.

"Could a rent suspension clause in the lease apply?"

A rent suspension clause is unlikely to apply as it usually only kicks in where the premises have been damaged such that there are unfit for occupation. Clearly, each clause should be reviewed however to see whether the COVID-19 outbreak could mean that the rent suspension should be applied.  You should also check your relevant insurance to see if you may be able to claim against loss of rent insurance in the circumstances.

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Tenants of Commercial Properties - FAQs

It is an uncertain time for landlords and tenants alike at present. Below, we have sought to address some questions we are being regularly asked by tenants of commercial properties. If you have any further questions arising, please do contact us.

"What action could my landlord take if we do not pay the rent due under the lease?"

If you do not pay the rent due under your lease, the below is a summary of the actions that your landlord may be able to take:

• Forfeiture The Government has passed legislation preventing landlords from exercising rights to forfeit leases of commercial premises where a tenant fails to pay the rent before 25 March 2022. Please see our separate note on this issue.
• Commercial Rent Arrears Recovery (CRAR)There may be practical issues in bailiffs attending or entering premises This involves sending a bailiff round to seize goods on the demised premises to pay the unpaid rent. There is a notice that needs to be served beforehand. However, restrictions over the use of CRAR were brought in in March 2020, and have been extended throughout culminating in the current position. There may be practical issues in bailiffs attending or entering premises if there are COVID-19 restrictions in place, e.g. the Government measures requiring people to stay at home except for very limited purposes during lockdown periods. UPDATE - For CRAR actions started after 24 April 2020, the minimum arrears necessary to exercise CRAR is 189 days rent. Where the notice of enforcement is given or goods are taken control of for the first time on or after 24 June 2021, the minimum amount of unpaid rent rises to 554 day's rent.
• Statutory Demand The landlord could serve a statutory demand giving you 21 days to pay the outstanding sum. If you fail to do so, the landlord could present a bankruptcy or winding up petition to make you insolvent. However, the Corporate Insolvency and Governance Act, which received Royal Assent on 25 June 2020 restricts landlords' abilities to serve statutory demands/issue winding up petitions as follows:
  • No winding up petition can be presented on or after 27 April 2020 on the ground that a company has failed to satisfy a statutory demand, if the relevant statutory demand was served during the period beginning 1 March 2020 and 30 September 2021.
  • As regards the presentation of a petition on the basis that a company cannot pay its debts as they fall due, no petition can be presented by a creditor from 1 October 2021 until 31 March 2022, unless the debt is over £10,000, and the creditor has reasonable grounds for believing that (a) Coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if Coronavirus had not had a financial effect on the debtor. The burden of proof is therefore on the creditor to demonstrate to the Court that it has reasonable grounds for believing that Coronavirus has not had a financial effect on the debtor or would not have mattered in any event. Given that very few businesses have been unaffected by the current pandemic, this will inevitably be a difficult test for the creditor to meet. This should therefore give businesses the opportunity to reach realistic and fair agreements with its creditors.
• Letter before Action The landlord could issue a letter before action and follow this up by the issue of court proceedings for the debt if not paid.
• Rent Deposit If the landlord holds a rent deposit, it could take the rent from the deposit account and ask you to top it up.
• Guarantor The landlord could serve a guarantor with a statutory demand or letter before action. If the guarantor pays, it is likely it would be able to seek recovery of the money from you via an indemnity. However, the limitations on the service of statutory demands/winding up petitions set out above apply to corporate guarantors as well.
• Interest Interest is likely to be payable on any late payment. The landlord could insist on you paying this.

Please be aware that if your landlord does seek to exercise any of these remedies, due consideration needs to be given to the occupational documents as each lease differs and there are certain procedures to follow. Please do contact the Property Litigation team if you need any specific advice on this.

"Can I come to an arrangement with my landlord to change the amount of rent or pause the payments?"

The simple answer to this is “yes”, but the arrangement needs to be clearly documented. As most arrangements will be in place for a relatively short period of time, it is unlikely you would want to vary the lease. As such, a side letter clearly documenting the arrangement should be put in place. The Property Litigation team has put a number of these in place for clients recently and are available to assist.

"Does the COVID-19 outbreak create an event which frustrates the lease such that we could walk away?"

This is highly unlikely. Frustration has a very high threshold to be met, which would involve you demonstrating there has been some form of frustration of common purpose that renders performance of the lease impossible. If the lease has a force majeure clause, you could seek to rely on it. It is very rare for a lease to include such a clause and, even if it did, it is uncertain whether it would apply given that the event is unlikely to be permanent.

"Will a tenant be in breach of a keep open clause if it shuts the premises?"

Strictly speaking, closing the premises will be a breach of a keep open clause. However, the courts will not enforce these clauses by granting orders for specific performance. We also consider it unlikely they will order a tenant to pay a landlord damages where a tenant is complying with Government guidance. In addition, if the rent continues to be payable under the lease, there is a question as to what the landlord's loss is.

"Could a rent suspension clause in the lease apply?"

A rent suspension clause is unlikely to apply as it usually only kicks in where the premises have been damaged such that there are unfit for occupation. Clearly, each clause should be reviewed however to see whether the COVID-19 outbreak could mean that the rent suspension should be applied. You should also check your relevant insurance to see if you may be able to claim for the rent in the circumstances.

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.